One of the most significant and enduring ways to increase business profitability is to continuously evaluate your cost structure and reduce costs where possible without sacrificing quality and customer satisfaction. You need to reduce both direct costs of producing your finished goods and business overhead.
Your profit improvement program should help you identify specific steps for cost reduction. These steps often include lowering total delivered costs with your suppliers and reviewing production processes and systems to eliminate waste.
Define material content
You want to start with an evaluation of each category of your cost of goods sold. This evaluation requires each category to be identified with the actual dollars spent and its percentage of sales.
The next step is to look at material content, which is usually your largest cost of sales category, both in actual dollars and as a percent of sales. It is not uncommon in industrial products for your material content to be between 40 and 60 percent of sales. Reducing material costs will immediately and directly benefit the bottom
line and does not require any working capital.
The next thing you need to do is define the specific material content of your products.
Work with suppliers to reduce cost
Companies should be sure to develop a global supply chain for procuring material and evaluate the suppliers for their ability to deliver on time with the required quality and lowest possible cost. Intensive Internet searches, referrals and supply chain conference seminars are all useful for finding and evaluating suppliers.
Displaying your products at supply chain open-house events can also be very effective for developing new sources of supply. Effective supply chain partners will constantly suggest product improvement and cost-reduction ideas.
Adopt an open-door policy for the supply base. You should always be willing to talk to anyone who has a potential way to help you reduce cost and improve quality.
Stratify material purchases
The ABC methodology stratifies all materials and parts purchased by a company into three groups. The A parts are the most expensive and critical to the company’s operations. They will make up 70 to 75 percent of your total material spend, but represent only 5 to 10 percent of the total number of part numbers you purchase.
B parts represent 20 percent of your material spend and about 20 percent of the total part numbers purchased. C parts represent 5 to 10 percent of your material spend but represent 70 to 75 percent of your total number of part numbers purchased. This stratification gives you and your supply base the focus to work on reducing the greatest costs.
Next you want to develop and analyze a purchase price variance report. Ask yourself what your actual spend is versus standard. What are the year-over-year changes? You should evaluate your supply chain’s delivery and quality by developing a scorecard to know how delivery and quality are influencing your total costs.
Another way to reduce material content and costs is product redesign or product simplification. Product simplification is the discipline of integrating the greatest performance functionality into the fewest number of parts using the most suitable and cost-effective materials and manufacturing processes.
Through product simplification, cross-functional product development teams have found that the rigorous combination of design and process innovation can significantly enhance market desirability and engineering efficiency.
Not only is it a team-building experience, but it is also a business opportunity that typically nets significant cost reduction and improved efficiency without sacrificing quality or product performance.
Make an effort to become a greener company by recycling. This can contribute to reduced total material content and increased profitability.
Matthew P. Figgie is chairman of Clark-Reliance, a global, multidivisional manufacturing company with sales in more than 80 countries, serving the power generation petroleum, refining and chemical processing industries. He is also chairman of Figgie Capital and the Figgie Foundation, a member of the University Hospitals Board of Directors, corporate co-chairman for the 2013 Five Star Sensation and chairman of the National Kidney Walk.
Rick Solon is president and CEO of Clark-Reliance and has more than 35 years of experience in manufacturing and operating companies. He is also the chairman of the National Kidney Foundation Golf Outing.
In the 40 years that Gary DeJidas has worked for GAI Consultants Inc., he hasn’t faced challenges quite like what he faced four years ago when the economic downturn dealt a hand of stagnancy, cutbacks or shutdowns. However, in those years, the GAI chairman, president and CEO hasn’t been as excited as he is today for what lies ahead for the $90 million engineering and environmental consulting firm.
“I’ve taken the position that yes, this is a downtime, but it is a great time to strategize and position for future growth,” DeJidas says. “We’ve grown to more than 800 employees now with 26 offices in 11 states. A lot of that growth has occurred in the last three to four years.”
The economic impact GAI experienced forced DeJidas and the business to buckle down and find ways to diversify offerings to rebound from hard times.
“The biggest parts of our business — our energy component, our transportation component, municipal services and real estate development — were greatly impacted by the economy,” DeJidas says. “As work either seemed to be delayed or actually shut down, we really had to adjust to the available work that was in the marketplace. It had a ripple effect through a number of our lines of business.”
Real estate development almost went to zero, municipalities were forced to cut their capital projects and states sidelined their department of transportation work. In the company’s Orlando office, nearly half of its 100 employees had to be let go due to the slowdown in work. DeJidas made adjustments and turned his focus on strategic acquisitions and growth initiatives.
“Because of the situation with the economy, most of us have had to right-size with the available amount of work that was out there,” he says. “We’ve managed to do a reasonably good job navigating through all of that.”
Here’s how DeJidas has adjusted to today’s business reality through acquisitions and smart growth at GAI Consultants.
When your company goes through a shock like GAI experienced because of the impact the economy had on its business four years ago, you can’t afford to hesitate when moving forward.
“No. 1, you have to make up your mind whether or not you’re going to be a risk-taker,” DeJidas says. “If you’re not a risk-taker, then you’re probably going to crawl in your shell and just hope it gets better. When I say a risk-taker, I mean a calculated risk.”
During the economic downturn, no one knew what to expect next. You could say the same about what’s in store for 2013. You just can’t be afraid to take chances.
“I don’t think any of us knows what the year is going to bring, but you have to stay optimistic that it’s going to be better than this year and not be afraid to take opportunities when they present themselves,” DeJidas says. “That separates a lot of CEOs in this world — those that are willing to take chances versus those that will be more conservative in what they do.”
He has taken the position that you have to jump at opportunities rather than sit and wait for an opportunity to gift-wrap itself.
“I’ve taken an optimistic view that we’re going to be successful, and when things start getting back to where they were in terms of economic vitality, we’ll be positioned to go a long way,” he says.
Strategically, GAI has been trying to grow its business in both new markets and new services. The company has expanded its markets in the Northeast, Southeast and Midwest, stretching as far as Wisconsin, which has been aided by new service areas.
“In the service areas, we’ve added things like airport-related services, nuclear support services, real-estate-related services and our objective is no matter what a client needs, they can find it here at GAI,” DeJidas says.
To make these additions successful in a time of economic downturn, GAI made the decision not to cut vital parts of the company.
“One of the things that a lot of companies do when things get tight is they cut things that will help them grow and develop,” he says. “Over these last three or four years, we have maintained all our training programs. If you want your staff to respond, you have to continue, even through tough times, to feed their career development objectives and look in those types of directions.”
Much like maintaining training initiatives in the company, DeJidas decided to turn his focus on areas that would benefit the business versus stressing over areas that weren’t adding value.
“The first thing to look at is what markets are responding right now,” he says. “If you have services that could be offered to that industry, you should strategically position yourself to do that. It’s really about finding areas that look like they are going to be strong financially in the coming years and trying to strategically move yourself in that direction.”
To achieve success in different areas that you haven’t been in before, you have to be nimble.
“You have to be able to say, ‘I’m heading in the right direction, or I’m heading in the wrong direction,’” DeJidas says. “You have to be able to see what’s working and what’s not working, whether it’s in a market area or a service area and make some adjustments.”
Make good on acquisitions
To take advantage of new opportunities in areas that GAI saw potential, DeJidas looked for acquisitions that could help give the company a foot in the door.
“It’s always better to go into a new market with an established reputation,” DeJidas says. “We’ve tried to go into markets and just position a person there and start from scratch. That’s a very hard way to go. That’s why the acquisition way, even if it’s a small firm with a good reputation that has been in that market for a period of time, is a much better way. That applies to services, too.”
If you attempt to break into a new market or service with no prior experience or history, you will have a long journey ahead of you to establish your business. DeJidas and GAI have used the economic downturn as an aid to make acquisitions that will benefit both parties.
“There are a number of really good firms that have had to struggle the same way everybody struggled, and some of these firms don’t have the types of resources that we have,” he says. “What that has resulted in is the number of firms looking for partners — someone to come in and acquire the firm and provide the resources for the firm to grow and develop.
“That’s where we’ve been very successful in identifying those opportunities with firms that I feel are very good firms but are casualties from the economic situation that we’ve been faced with for the last several years.”
GAI has been doing acquisitions for nearly seven years now. In 2012 alone, the company went through four acquisitions and saw revenue improve 15 percent over 2011.
“The biggest thing with acquisitions is finding a firm that has a similar culture even before you start talking about money or anything like that,” he says. “People in general have a very difficult time with change. So if you acquire somebody whose culture is dramatically different than yours, then they’re going to struggle and you’re going to struggle. You have to make sure culture is very similar.”
Sometimes it’s easy to ignore how cultures will match up because the opportunity at hand is so great. You have to strike a balance or success will be very difficult.
“I always lean toward the culture because if you’re acquiring good people and the firm has a good reputation, the odds are in your favor that you’ll be successful,” he says. “Is there a balance? Sure there’s a balance. A lot of times companies focus on the practice versus the business.
“What you really need is a blend of the two. You’re trying to obtain a balance between the quality in the services you provide and the ability to run it as a successful business.”
On top of finding a business that will improve your company and that is a cultural fit, you must also be able to identify strong leaders who can help your business grow.
“Make sure you have key individuals who are familiar with the business that you can really put trust and faith into once the acquisition occurs,” he says. “They are the ones that hold the key to the business and have all the client relationships.”
Ultimately, the key to a successful acquisition is doing your due diligence throughout the process.
“You have to go through an extensive due diligence examination,” DeJidas says. “Sometimes it’s hard to uncover all the rocks and see what’s under all those rocks.” ?
How to Reach: GAI Consultants Inc., (412) 476-2000 or www.gaiconsultants.com
- Don’t be afraid to take risks.
- Find new areas to grow your products or services.
- Make strategic acquisitions to grow your company.
The DeJidas File
chairman, president and CEO
GAI Consultants Inc.
Education: Went to Point Park University and graduated with a B.S. in engineering and also received an MBA
What was your first job and what did you learn from that experience?
I worked at a gas station years ago when gas was 25 cents a gallon and you would get your oil checked and you tire pressure checked and your windshield and back window all clean. The thing I learned from that was service. It was all about servicing the customer.
What is the best business advice you’ve ever received?
Never ask people to do something you wouldn’t do yourself. Lead by example.
What excites you about GAI’s future?
I think we are very well positioned to move forward dramatically. In 10 years that I’ve been CEO we’ve more than doubled our size. I’m excited to start thinking about the next 10 years.
If you weren’t a CEO, what is a job you have always wanted to do?
I’d like to be a professional golfer, but I’d probably starve. I would like to be a teacher and someday I may teach. I enjoy speaking in front of people and I enjoy teaching. With what I know, having the chance to share that with others would be very satisfying to me.
Nonprofit Board Executive of the Year Award
Alzheimer’s Association of Greater Cincinnati
www.alz.org/cincinnati/ | (513) 721-4284
Just 21 months into her tenure as executive director of the Alzheimer’s Association of Greater Cincinnati, Paula Kollstedt has moved an already well-run organization to record achievements. She invites people from government, business, education, community and individuals to engage in little and big ways as the organization moves toward a vision of a world without Alzheimer’s.
Kollstedt knows Alzheimer’s disease in a deeply personal way and the career and leadership role she is in now is in fact a “second act” after 25 years at GE Aviation. More than 12 years ago, she began the journey as a caregiver after her husband was diagnosed with early onset Alzheimer’s. The disease and its related complications are the sixth-leading cause of death in the U.S., and the only one in the top 10 that is increasing.
Kollstedt combines her laser-focused business skills and expertise with personal experience in a graceful manner in order to impact the Alzheimer’s Association of Greater Cincinnati in profound ways.
Her approach is always “win-win” as she understands the importance of everyone benefiting. This strategy, along with her servant-leadership style, resulted in a 2011 walk season (the chapter held five fundraising walks) that generated more than $500,000 to fund programs and services within the organization’s 27-county service area.
Kollstedt is constantly communicating with her senior staff and identifying new opportunities and avenues for engagement. She works urgently because someone in the U.S. is diagnosed with Alzheimer’s every 68 seconds. Kollstedt consistently offers visionary leadership and attention to data as well as constant evaluation of processes to ensure energy is expended wisely.
In this issue, we honor 22 finalists representing a diverse group of companies and organizations of varying sizes. While they may be different in many ways, one thing that they all have in common is their commitment to strengthening the bond between the for-profit and nonprofit worlds.
This is an important conversation, and at this year’s event, we intend to explore it.
It occurred to us many years ago that few things are more meaningful and important than investing time and resources in supporting our community, and we felt the need to honor companies and their employees who have gone above and beyond the call. While support and direction come from management, companies are only as great as their employees.
For that reason, we are quite proud to present the Medical Mutual SHARE Award. This unique award was founded to recognize companies whose employees best exemplify the ideals of Medical Mutual’s own employee SHARE Committee. SHARE stands for serve, help, aid, reach and educate, and it is the heart and soul of Medical Mutual’s charitable giving effort.
The SHARE Committee, made up of Medical Mutual employee volunteers, helps coordinate more than two dozen community events involving nearly half of the company’s 2,500 employees.
On behalf of Medical Mutual and SBN, we hope you enjoy reading about these great companies and we offer congratulations to all of our Pillar Award recipients.
president and CEO
One of the questions I wished I focused on earlier in my business career is, “How do I ensure my company remains a great place to work?” The answer: You consciously craft its culture.
What is culture? Try to think about your company as a person, with a specific personality. Do you like it?
You may be thinking the personality (culture) of your company happens organically, or that it’s simply an extension of you. Most founders I’ve met start their companies with a strong vision and a passionate belief in what they’re doing.
When a company is small, it often adopts the personality of its leader because the leader is in direct contact with every employee daily. His or her personality is so dominant that it outweighs all others.
But before you know it, you’re on the road to success and it’s time to hire more people to grow your business — and this is when culture can get away from you.
New people bring new attitudes to work that may be different from yours. But in the spirit of working together, accommodations are made to try to keep people happy. Soon, the company isn’t what you imagined. People aren’t handling customers with the same care you would. Going to work every day isn’t fun. You find yourself thinking: How did we get here?
Assessing an individual’s fit is always a challenge. We all want to hire smart, hardworking, creative individuals. A touch of genius is nice too. Yet if you’ve ever hired anyone, you know that the hiring process is tricky. All kinds of personalities show up for interviews. One candidate arrives with an extensive skill set or impressive resume but a questionable work ethic or flat personality. One shows up with a great personality but less-impressive resume. Whom do you hire?
Use the ultimate test
A friend of mine, who had a successful career as a venture capitalist, once told me about an ultimate test he would apply when investing in a company, called the “Toledo Test.” Here is a variation: Imagine a massive snowstorm in Toledo, Ohio, and you and your hiring candidate are stranded. The airport is closed. You must spend the weekend sharing a hotel room with this person while the storm passes.
If the thought of being with this candidate in this situation strikes fear in your heart, do not hire the person. If the thought sounds fun, evoking images of the two of you solving the world hunger problem over a few drinks, then hire the person.
We can’t always accurately assess someone right off the bat, and that’s OK. Mistakes happen.
Admit your errors
The other key to building and maintaining great culture is admitting when you’ve made a mistake and fixing it. The greatest mistake I made in all my years of business was not firing people fast enough. A bad fit negatively affects the business and also the good hires — employees who are killing themselves for the cause, sacrificing family time and vacations while they watch others goof off.
Now some of you may feel this sounds a little harsh. However, I’ve learned that firing a person who is clearly a bad fit is not only good for the company, but it’s good for the individual. Don’t believe me? At a wine tasting in California, I ran into a woman whom I had fired years earlier. Now she owns the beautiful winery and is so much happier.
So the answer to crafting a successful culture is hire better, fire faster. Spend more time finding the right people so you make fewer mistakes hiring. And when you discover you’ve made a bad hire, remove the person as quickly as possible, before they affect the “personality” of your company.
Terry Cunningham is president and general manager of EVault Inc., A Seagate Co. He founded Crystal Services, which was purchased by Seagate in 1994 and integrated into the company’s software division, which then became Seagate Software. His accomplishments include serving as president and COO of Veritas Software and founding, building and leading two other successful software companies.
PricewaterhouseCoopers was biding its time. Like many other professional service firms, the recessionary years of 2008 and 2009 kept the company’s leaders conservative in their people strategies, but they were also waiting and ready for growth to resume. Because when it did, they were ready for it.
“During the recession, we were really focused on retaining the people that we had across the firm, expecting that when things started to turn around and client demand increased, that No. 1, we’d want to make sure that we kept as many folks as we could by avoiding reduction in force during the recession — a big investment,” says Jim Henry, who was PwC’s U.S. client and industry leader before becoming the managing partner of the San Francisco market in 2010. “And then No. 2, coming out of it, we knew that we’d need to significantly build up our resources to match client demand.”
As the new managing partner, Henry walked straight into the hiring blitz. In just 24 months, he helped PwC San Francisco grow its head count from 1,000 to 1,400 people, all while retaining a top team in one of the most competitive talent markets in the country — the Bay Area.
Here’s how Henry builds a team of talent that can serve the needs of PwC’s clients.
Expand your search
At PwC, building a top-performing team starts with the hiring process.
Historically, the firm has been a big recruiter of entry-level employees, using local campus hiring as a primary source of new talent. However, as other Bay Area businesses have rebounded, it’s been more of a struggle to attract enough local students to build out the firm’s advisory, assurance and tax business lines.
“To meet the demand, we’ve really expanded our recruiting network to bring in people from schools outside of the Bay Area,” Henry says.
Today, about half of the firm’s entry-level hires come from outside the Bay Area, a significant change from the past. Companywide, PwC has also opened its campus recruiting programs, which used to target only local accounting graduates, to students from a variety of backgrounds — information systems majors, engineering majors and MBAs.
The firm has also put a greater emphasis on acquiring experienced employees from other companies to help broaden its capabilities in strategic and high-growth areas. And again, it’s achieved better results by taking the search national.
“It’s all about us having the right capabilities to serve clients in the areas of their growth strategy, their operation effectiveness, and making sure that they’ve got efficient and effective risk and compliance processes,” Henry says.
“We prefer to find local people, but given that the Bay Area is a really attractive place right now, how vibrant the economy is and that it’s a very desirable place to live, it’s becoming a bit easier to attract people here from out of the area. So we’re really approaching it as a national search in most of our experienced hiring.”
Today, the company utilizes a combination of internal recruiters and outside search firms to identify experienced hires who would be a good fit with the firm. Still, whether these efforts are local or national, the best recruiting leads tend to come from the firm’s existing employees.
“We’ve asked them through our internal communications, and then offer recruiting referral bonuses to help them identify talent that they think would be a good fit in the firm,” Henry says. “As a result, we’ve had more than 40 percent of our experienced hires come through employee referrals. That’s absolutely the best source.”
Offer helping hands
Just because someone makes it through the screening process doesn’t mean that he or she will have immediate success at your company.
As PwC has hired more people in entry-level positions and management roles, Henry has found that many people need help and support as they integrate into their new job and corporate culture.
“It’s critical that both the new people who join the firm and our existing employees have very clear and frequent feedback about how they’re doing and get the support they need to make sure that they’re successful,” Henry says.
One way the company helps employees adapt to the new environment is by plugging new hires into teams where they can quickly understand what’s expected of them. Working in teams allows people to seek guidance and feedback from more experienced peers, who can also serve as coaches and mentors.
“That’s really key to success,” Henry says. “As people are working in teams they better understand how their background and experience fit together with the rest of our people when they are out serving the needs of our clients.”
It also provides opportunities for different teams to learn about each other’s activities. For example, as it began adding more new people from other companies, the San Francisco office began holding a monthly “meet and greet” for its experienced hires.
“They bring their own lunch and meet at our office in a conference room,” Henry says. “It’s an open door thing for whoever is interested and available just to talk about their backgrounds and share some of what we’re doing in PwC.”
New teams are also encouraged to get to know other teams and find ways to complement their efforts if possible. The company’s new national sustainability team recently visited San Francisco to share its goals and learn how it can incorporate them throughout the firm.
“They’re getting their goals and priorities aligned and then trying to understand how they fit into the rest of the firm, someone who might be doing supply chain consulting or tax advice on moving operations,” Henry says. “Just about everything else that we do in serving our clients could have some element of sustainability. And that can be brought into making sure we’re creating the most value for our clients.”
Give people success models
Of course, offering competitive compensation is an easy way for employers to show people value when they bring them on board. However, long-term retention requires that companies show people an ongoing commitment to their financial and professional sucess.
As more people integrate into the company’s culture, Henry and his partners have looked for new ways to connect them to the goals of the business. One way is by helping diverse talent excel in the organization by having each partner sponsor three diverse individuals in the firm who represent strong leadership abilities.
“The sponsorship piece of it originated in our diversity programs, looking at the goal of trying to have the same diverse mix of talent at our leadership levels as we do at the entry levels,” Henry says. “What we find is with all the best work and coaching and development, we still have attrition for different groups at different career points.”
The sponsorship relationship goes beyond coaching. Each partner serves as a personal advocate for their sponsees, whether it’s by creating opportunities for advancement or nurturing their professional growth.
“That’s reflective of the work that we’re doing to make sure that we’re creating opportunities for people who really demonstrate the leadership abilities,” Henry says.
In addition to prompting positive feedback from clients, PwC’s diversity efforts have earned it the No. 1 spot on Inc.’s Top 50 Companies for Diversity in 2012.
Establishing a “milestone rewards” program is another innovative step the firm has taken to show employees their growth potential. The rewards program gives employees special incentives as they rise to different levels within the firm. So a promotion to manager is now accompanied by a large cash payment or an employee who reaches the level of director is rewarded with a brief sabbatical.
“So when you’re promoted, there’s actually something that’s unique to that promotion on top of the normal compensation and reward system,” Henry says. “It’s those kinds of things that change the conversation from comparing dollars to dollars with one job to another to really understanding what people need and value at different points in their career.”
Build a rep
One of the chief reasons that PwC is able to entice experienced hires and new grads to its ranks is its reputation as an enjoyable and attractive workplace. In 2012, the company was named on Fortune’s top 100 best places to work for the eighth consecutive year.
“The really important aspect of people retention to me, aside from all the programs and different focus areas, it’s got to be an environment that people feel connected to, that allows room for innovation and that they can have fun,” Henry says.
Creating an enjoyable workplace requires leaders to be responsive to their people’s needs. Companies that consider options such as flexibility and work-life balance in addition to compensation will have an easier time keeping employees happy long-term.
“Flexibility seems to be the No. 1 issue that comes up as we talk to people in our surveys and direct feedback about areas that they think we can support and help them in their personal and professional career development,” Henry says.
Ask people what they need to be successful in their jobs, and then look for ways to support that, Henry says. PwC has each team work closely with its members to plan for their desired flexibility as they organize client service work. The firm has also adapted certain company policies, such as the flexible summer Fridays program, to account for the way employees want to work.
“Instead of telling people what day we think would be good for them to take off, we’ve now changed it to just say summer ‘flex days,’” Henry says. “Each week everyone should be working with their team, determining what flexibility they would like to have in their work schedule and building that into their team plans. For one person, it might be that they need a Tuesday afternoon off to do something, and for others, it may be a Friday. But that’s got to be something that’s very individual-based.”
Henry knows that another key ingredient in an attractive workplace is an atmosphere where people can let their hair down from time to time. So when it comes to having fun, he is happy to lead by example.
“We’ve done a lot of things here to just put a little humor into work and allow time for people to get together and hear the strategy but also have some celebration and some fun in the process,” he says.
For the firm’s Promotion Day celebration in June, Henry coordinated a celebration at San Francisco’s Port Mason entire office, emceed by an employee who works as a part-time comedian. And when the Giants made it to the World Series several years back, he showed his team that he was more than game for a practical joke.
“Someone got the crazy idea of the Giants wearing beards,” Henry says. “Therefore, I had to have a beard. Even though I didn’t grow one, because I can’t grow a good one, any time I sent out a memo with my picture, my assistant would Photoshop in a beard on it. And then I started wearing fake beards to meetings with our people. We had some real laughs with that.”
In just two years, Henry’s office has added more than 400 new employees, a clear sign that these people strategies are working. But, of course, the number that says the most about the firm’s success is its employee turnover rate.
“Studies generally show that people don’t leave companies, they leave their bosses if they go somewhere else,” Henry says.
“We are at record low numbers right now in San Francisco as well as in PwC for voluntary turnover. That’s maybe the best indication considering, in most cases, people vote with their feet.” ?
How to reach: PricewaterhouseCoopers, (415) 498-5000 or www.pwc.com
The Henry File
PwC San Francisco
Born: Pontiac, Mich., and grew up in San Diego
Education: Bachelor’s degree in accounting from San Diego State University
What would you do if you weren’t doing your current job?
Working in an emerging technology company.
What is one part of your daily routine that you wouldn’t change?
Working out in the morning — after my first cup of coffee!
What would your friends be surprised to find out about you?
I enjoy surfing.
What do you do for fun?
My wife and I entertain a lot at our house, and she is teaching me how to cook.
What are best pieces of advice you’ve gotten in your career?
First, as a leader you’ve got to have a clear vision of what’s important. And by that I’d start with what really are your values. What are you really trying to accomplish from a broader mission perspective? Then agree with your team on a few things that for the next year are most important that you are trying to accomplish. Consistently reinforce that in communication and monitor progress. The other thing I’d say is always be thinking about creating opportunities for people who may be your successor down the road.
Larry Feldman was living a double life. As assistant minority counsel of the House Banking Committee, his day job was dealing with Capitol Hill’s most pressing issues: the Chrysler bailout, alternative fuel sources and cradle-to-grave health insurance. But come lunchtime, he headed across the street to oversee an operation pretty much as critical to Washington’s well-being. Feldman, you see, managed the local Subway.
“I would do congressional hearings in the morning, run across the street, take off my jacket, put on my apron and stand behind the counter to make sure the operation was going well,” says Feldman, CEO of Subway of South Florida and Subway Development Corp. in Washington, D.C. “These lobbyists would look at my face and say, ‘You look very familiar.’ And then after lunch, I would run back, take off my jacket and do hearings.”
Since opening up his first Subway location 35 years ago, Feldman has grown his territory of restaurants to approximately 1,500 locations and 1,600 employees throughout Washington, D.C., Maryland, Virginia, Delaware and, most recently, South Florida. But his success hasn’t just earned him respect in the franchise world — it was Feldman who helped pioneer Subway’s development agent growth model in 1979 — it has also earned him a nickname: Mr. Subway.
By eliminating company-owned stores and empowering entrepreneurs to grow territories through franchised locations, Subway has become the largest fast-food chain in the world, surpassing the iconic McDonald’s with more than 37,000 locations worldwide. Here’s why the growth model is still viable and successful decades later.
As a business with locations worldwide, maintaining consistency across its many stores is critical to Subway’s reputation. So it’s important for owners like Feldman to have the proper controls in place to keep operations consistent and maintain quality throughout their territories.
One way the company does this by maintaining high standards of compliance for its store owners.
“We’re very, very strict in our requirements for compliance,” Feldman says. “Part of the support is 80 percent of my staff is made up of operations analysts. They go into the field and are in their stores at least once a month. They do full evaluations that start with cleanliness in the front window and go right on through the store, including marketing recommendations, attitude of employees — all of these things.”
Driving consistency internally is also why Subway doesn’t sell to professional chefs — who are tempted to try to “improve” on the business model.
“Chefs always are looking to create a better way,” Feldman says. “And while we’re always looking at our corporate offices to do that, and have a tremendous amount of success from franchisees who give us recommendations, it basically is that when you go into a Subway regardless of where it is around the world, that you know that you’re getting a consistent product. The look is consistent.”
For Subway, the food part of it and the product part of it can be learned and trained. The real work of the owners is growing the business in the community, from “the outside in,” whether it’s sponsoring local Little League games or working with not-for-profits.
“It’s understanding how to take those tools and get out there and market your business,” Feldman says. “We look more for people who will participate in marketing and bringing customers in, because we can teach you everything that needs to be done in the store itself.”
When the goal is consistency, you want store owners who are entrepreneurs, not industry professionals.
“They would come back after two weeks of training thinking they knew how to grow their business their way,” Feldman says. “But this doesn’t work as a large-scale concept. At the franchisee level — success is about following the model.”
Keep it simple
Subway’s simple operation — with no fryers, no grease traps, and a simple menu — makes it easy to run, and gives the company the control to easily manage food and labor costs. But how do you promote new ideas when you’re worried about overcomplicating your brand? At Subway, it’s by practicing “controlled innovation.” At the national level, the company sets aside an innovation fund specifically for testing ideas for the restaurants that are submitted to the company from customers or franchises. Every new idea goes through a thorough and carefully controlled approval and testing process.
“We can’t have everybody out there saying my grandma has a great recipe,” Feldman says. We need to go out there and try it.”
Recommendations are made through the franchisee development office. Approved ideas will go through a strict testing procedure starting with 100 stores, then 1,000, then 2,000 stores — which are checked for compliance — until the idea is reviewed for the entire system. Stores also must report daily and weekly through the computer on how many of the product are sold, what hours and so on. This info is sent to the home office in Connecticut where analysts examine the idea before sending their suggestions to corporate. The controlled process ensures ideas are only rolled out to the entire company that can be consistently executed and that complement its bigger health and price-value messages.
“So it’s not just an off-end product that’s left out there,” Feldman says. “It’s not just somebody that wants to test something on their own. There’s a very specific testing program.”
That’s not to say the company hasn’t adapted. A key reason that Subway has been able to stay relevant in the crowded fast food space is by proactively expanding its product mix to appeal to a wider range of consumers. As home of the $5 foot long, the brand has been able to capture a larger market share of people who see it as an affordable option. It was also one of the first to respond to the growing trend of health and wellness.
In the past five years Subway's variety of products has increased dramatically, all tied to the health offerings. But the company has also carried out these changes in a very conscious way, Feldman says. The company has been successful at adding the healthier options because they are just that — options.
While it now provides things like calorie counts, reduced sodium options, and diabetic menus and healthier menu items such as salads, flatbreads and lean meats, Subway has also kept its indulgent subs like its BMT, meatball and steak and cheese. Diners can still add mayo or a bag of chips.
“Choices should be there,” Feldman says.
“That has been a tremendous part of our growth; but the fact that I can also come in and get that indulgent sub as well and I’m not a health food franchise — I’m here for everyone.”
The importance of keeping it simple has only been verified by the company’s testing of newer concepts like Subway cafés, designed by Feldman’s office for national in response to landlord’s looking for a more upscale Subway. In addition to the regular menu items, Subway cafes include offerings such as paninis and gelato.
“What we found was that the landlords thought that these big fancy law firms and investment firms that the people would demand all these fancy things,” Feldman says. “But when we opened these restaurants, more than 80 percent of the purchases are still our traditional Subway fare. So people are still coming down and getting their tuna sub or cold cut combo.”
Feldman points to four areas that have been critical to Subway’s success: product, control, simplicity, and support. The brand’s ability to adapt and grow while maintaining simple and consistent operations has helped make it ubiquitously appealing while allowing it to go places other fast food chains can’t, for example, YMCA’s, school systems, colleges, universities, and hospitals.
“If you’re a food service director in a hospital, you’d say, ‘Why would I bring a McDonald’s into the lobby when our whole message is about health?’ Feldman says. “And then when you look at other competitors and they’re still back in the 80’s as a sandwich concept with some increasing regard for things like calorie count and health message because they have to be, because the public demands it.”
But Feldman says that it’s the last pillar — support — that’s played the biggest role in the company’s success.
Before the company’s development agent model, support for restaurant locations typically came from corporate employees. Now that’s changed to where franchisees have a local team to back their success anywhere in the world.
“When you live the community you have someone that’s a phone call away,” Feldman says. “It’s not calling the corporate office and saying ‘Hey, I need help when can you send somebody down?’...as opposed to somebody who could be there that day. And that’s why Subway has been so successful. We have boots on the ground in every single city in the U.S. and now in 102 countries around the world. So if I have a problem, I am there and being supported.”
The company also has one of the lowest franchise fees in the country, which Feldman says points to the profitability of the concept. Rather than making the money on the sale of franchises, the company makes money off of the profitability of the stores that it helps succeed. Having all four pieces — product, control, simplicity and support — is really what’s allowed Subway to “build a better mousetrap” than competitors in the marketplace, Feldman says. During the worst economy, Subway’s numbers are staggering. It’s achieved continual upward increases in customer base, marketing and advertising and average unit volume.
“These are all things that are basics, but I think over the years we’ve really forgotten those basics,” Feldman says. “Now more than ever, now that people are really concerned about their dollar and where that goes — you need to show them that you are the best, that you bring the best value to them, and you are there for them if there are issues.
“For us it really is a Cinderella story, in that we were very different then than we are now. When I went to college the only choice was a foot long sub. The menu was very limited. There probably were about eight sandwiches. Now, Subway has become more of the healthy alternative. We have morphed into the concept where everyone can go to get their lunch, their dinner and now their breakfast.” ?
How to reach: Subway South Florida, www.southfloridasubway.com, or Subway Development Corp. of Washington, www.subwaydcw.com
CEO, Subway of South Florida
CEO, Subway Development Corporation in Washington, D.C.
Born: Brooklyn, New York
Education: B.A., University of Bridgeport, J.D., Brooklyn Law School
What would you do if you weren’t doing your current job?
Be a lobbyist in Washington, D.C.
What would your friends be surprised to find out about you?
I cry at sappy TV commercials and movies.
If you could have dinner with one person you’ve never met, who would it be and why?
President Clinton. His caring and concern for the world and its people is admirable.
What do you to regroup on a tough day?
I watch a great action movie.
What do you do when you’re not working?
I spend time doing anything with my family.
When Affiliated Computer Services Inc. was acquired by Xerox Corp. in 2010, Natesh Manikoth saw an opportunity to utilize the resources and talents of one of the most innovative companies around and apply that innovation toward solving transportation infrastructure problems.
The acquisition of ACS, a $6.5 billion company, created Xerox’s Transportation, Central and Local Government Group, where Manikoth serves as chief technology officer. The 6,500-employee division provides system solutions for tolling, parking and transit.
“Xerox has a rich history of innovation,” Manikoth says. “One of the first business units to take real active advantage of that wealth of innovation talent within Xerox was transportation.
“We became very active partners with the research community in Xerox to tap into their brainpower to say, ‘You guys have been doing wonderful work with document management and producing world-class printers. How do we take that talent and apply it to solving problems for cities?’”
The division has developed roughly 50 percent of the tolling systems in the U.S. and parking systems in areas all over the country, and it provides public transit systems globally in more than 30 countries.
Here’s how Manikoth is using innovation across divisions to create better solutions in the transportation arena.
Solve the real problems
A lot of large technology companies have started to realize that technology becomes commoditized over time. Business becomes a harder game, and growth begins to stagnate. So Xerox made a conscious choice to supplement its technology offerings with services in order to grow.
“That was the rationale for the acquisition of ACS,” Manikoth says. “Now we are probably a 50/50 company between technology and services. The offerings we have solve real problems that our customers have.”
In transportation, throughout the last 10 to 15 years and going forward, the biggest challenge is more and more demand. The problem is you cannot grow infrastructure fast enough to deal with that increase in demand.
“You cannot build your way out of the problem,” he says. “So you are looking for how you can use the existing infrastructure more efficiently. What we help do is one way of saying, ‘I have this fixed asset called the road with five lanes. I’m only able to transport X number of vehicles through there. How do I now make it X plus 10 percent more?”
Xerox’s transportation group was at the forefront of electronic toll collection, which was a simple way of improving the toll process and increasing traffic flow. The combined forces of ACS and Xerox allows some of the best minds to contemplate those problems.
“All that talent has really been focused on document management and improving information flow,” Manikoth says. “ACS, on the other hand, used to be the people who did the work and built products to solve a particular customer problem but was not necessarily helping our customers think about what happens 10 years from now. That is what Xerox did extremely well.”
Do some thinking
Xerox thought about document management and information flow and what the offices of the future might look like. Now those researchers have the opportunity to sit down with stakeholders in cities to think about what the cities of the future are going to look like.
“Seventy to 80 percent of GDP in this country is generated from urban centers,” Manikoth says. “So if there is one problem we can help solve which will have the maximum impact, it is to make those urban centers more efficient.”
In L.A., Xerox is helping to modernize parking infrastructure. The key component there is real data analytics to predict parking availability so that people don’t drive around looking for a parking space. Xerox used a dynamic pricing engine to optimize parking availability.
Also in L.A., Xerox implemented a dynamic pricing mechanism to let people use high-occupancy vehicle lanes, which have been exclusively for buses and other high-occupancy vehicles. Now you can pay a toll and use the HOV lanes. It’s an example of a slightly underused infrastructure now being used to improve the traffic conditions in the area and having people pay for the privilege of doing that.
Think innovation, think savings
Xerox is also looking at how it can improve the systems it creates for infrastructure. One of the research things that Xerox is working on is power saving.
“The idea is these pieces of equipment consume a lot of power, but they might be sitting idle a lot of the time,” he says. “So how do you reduce the power footprint?”
The transportation group is working with Xerox around the technology it uses in printers to save power and is applying that to systems in transportation.
“To do power consumption in an intelligent fashion is an art and a science and they have tons of research surrounding that,” he says. “The same thing applies to the transportation infrastructure.
“There are lots of places where we have equipment, which is powered on 24/7, but people show up at peak times and use it heavily, and at off-peak hours, it probably isn’t used at all. So there’s potential for energy savings in those environments, and we are applying that in our devices in transportation.”
Over the past couple of years, there has been a significant shift in the research stemming from technology to the services market.
“You have to adopt innovative practices that are successful in your other lines of business,” Manikoth says. “The common theme I see is people ask the researchers, ‘What are the solutions you have?’ The ones who I see being more successful are the ones who have conversations about the problems.
“You cannot draw the connection between what was your domain and research by looking at what the researchers are capable of. The connections start becoming apparent if you look at the problem a little more deeply.”
To make these kinds of connections, Xerox brought researchers from three different labs into conversations with its business units and didn’t say which problems were going to be solved. They asked businesses to articulate their customers’ problems with questions such as, “If the customers had a dream that they got fulfilled, what would it be? What particular problem of their customer would they love to solve?”
“When the problem is posed appropriately, the solutions seem to match things which we have solved before,” Manikoth says.
“... The first step is to really understand what the problems are and what the customers want to solve. What is their desire? What is their dream and what problems would they like solved in a picture-perfect scenario and then bridge that gap. Figure out whether you have offerings or whether your partners can bring something to the table to solve those problems.”
The reason Xerox asks questions up front is to make sure the problem is being broken down to its essence and that the wrong problem isn’t being solved.
“In the Xerox world, we’ve split research into things where we are partnering very closely with customers and then we have really exploratory research as well where we think about what some of the big ideas might be over the next four or five years,” he says.
“... For the foreseeable future, we believe making these cities more efficient in all modes is going to be very important. We think we can make a profitable business there and at the same time help cities improve their infrastructure and services.” ?
How to reach: Xerox Transportation, (312) 529-3284 or www.acs-inc.com/transportation-new.aspx
When Jon Irwin listens to music, he uses his Android smartphone to crank out the tunes. As president of Rhapsody International Inc., Irwin wants his customers to be able to listen to any song, at any time, on any device.
“You should never be without your music,” Irwin says.
That’s the motto with which Irwin leads Rhapsody. To provide that level of music access, he is implementing a two-pronged growth strategy that focuses on direct-consumer marketing and alignment with distribution partners to put Rhapsody’s services in front of more customers and increase its service capabilities.
Rhapsody, a 200-employee music subscription service company, has been in business for more than 10 years. Until 2010, it was a joint venture between Viacom, under MTV Networks, and RealNetworks before being spun out on its own.
“That was kind of a great combination, because we were able to leverage the technology within RealNetworks and the marketing prowess of Viacom and MTV Networks to promote the Rhapsody brand to support the business,” Irwin says. “In 2010, we separated as an independent company, and … since that time, we have more than doubled our customer base. We announced last December that we had gone over 1 million subscribers.”
Those 1 million-plus subscribers pay $10 a month for the company’s primary product, which provides access to more than 16 million songs and spins up Rhapsody’s annual revenue north of $120 million.
To keep subscribers happy and gain new ones through the growth of the business and its capabilities, Irwin has already lined up a few key partnerships. Recent acquisitions include Napster’s U.S., German and U.K. businesses.
“What you see in doing that since the spinout is an entrepreneurial company with great resources, that’s operating in this business at scale and has been able to innovate — not only on mobile products but on distribution models through companies like Metro PCS and Verizon Wireless and is expanding internationally by acquisition with Napster,” he says.
Here’s how Irwin is speeding up the tempo at Rhapsody through a dual-pronged growth strategy.
Support your strategy
Rhapsody was the first on-demand music subscription provider. It saw a market with an opportunity and it capitalized on it.
“Most recently, if you look at the trends within this space and what the business has done, we were so far out in front of this business, nobody else even entered it until the second half of the last decade,” Irwin says. “The business really started to grow beginning in 2009, driven by some of the capabilities of smartphones, mobile devices and network capabilities that really enabled music to be truly portable and make it a fantastic user experience for people to take music with them.”
To expand on the capabilities of smartphones and mobile platforms, Rhapsody has partnered with companies in the wireless arena.
“Last August, we launched a partnership with Metro PCS, which actually took the access model of music to a bundled concept,” he says. “Metro PCS is the largest noncontract wireless carrier in the United States, so customers get unlimited music included with their wireless plan. That’s a very exciting way for us to bring our service to folks.”
Rhapsody also saw an opportunity to buy the Napster business from Best Buy as a way to reach more customers. Best Buy had acquired Napster in 2008 and thought it was a natural fit for the music and connected devices sold in the store and subscription music play.
“What had happened over that period of time was there were challenges in the retail space and Best Buy was working on aligning its strategy,” Irwin says.
Best Buy was soon unable to give Napster the attention it needed. Napster’s product innovation and growth began to suffer because of it.
“We approached Best Buy a little over a year ago and started discussing whether it makes sense for Best Buy to alter its strategy a little bit and not walk away from it, but maintain a stake in the digital music business and be an equity stake in Rhapsody and we would take over those customers and operate the business both in the U.S. and overseas,” Irwin says.
“They decided that made a lot of sense, because it allowed them to focus on their core business. At the same time, they were able to stay in the game with the digital music and subscription music business that’s consistent with a lot of the products they sell.”
Rhapsody acquired Napster last November in the United States, and at the end of March 2012, it also closed on the acquisition of the Napster business in Germany and the United Kingdom.
“That gave us our first international presence, which is an indicator and foreshadowing of future expansion we plan to do over in Europe,” he says. “We not only acquired a great customer base to be No. 1 in the market in Germany, but we have a very capable and seasoned team to continue to build the business, not only in Germany and the U.K. but in the rest of Europe. That was an exciting time for us to support that aspect of the strategy.”
Irwin and Rhapsody plan to keep looking for the opportunities that align with the company’s strategy.
“We are bringing the Rhapsody service to consumers directly and are continuing to innovate on the mobile products and work with distribution partners, both in the United States and internationally,” he says.
“This is to include music in their core offerings and work in partnership with those distribution partners, whether those are cable companies or wireless carriers, to make sure the way the service is being delivered to their subscribers is good for everybody involved. I don’t think there is anybody in the business better than us at doing that.”
Grow through acquisition
The acquisition of Napster played right into Irwin’s growth strategy. Napster helped Rhapsody reach more music listeners and the connection to Best Buy allowed Rhapsody to expand the kinds of devices customers could use to listen to music.
“If you go into a Best Buy store, a lot of the electronics they sell have Rhapsody integrations built-in,” Irwin says. “Overall, getting us in front of those customers is consistent with our mission and our goal of having all the music you want within arm’s reach.”
While Rhapsody acquired Napster less than a year ago, it has been a key factor to the company’s recent success because it was such a good fit. Growth through acquisition is successful if that acquisition supports your objectives and strategy.
“For us, scale and being able to acquire those subscribers and bringing them over to the service was a natural fit,” he says. “In the subscription business, scale is important because the more subscribers we have, we’re leveraging the platform that we built. That consistency with business objectives is No. 1.”
Once you have acquired a business, the No. 2 most important thing to keep in mind is the relentless planning and caring you need to do about how you treat the customers of the acquired company.
“You want to welcome them in a way that isn’t disruptive and, in fact, actually delights them and makes them happy they are over in this new house,” Irwin says.
Rhapsody did specific things in the planning and the migration processes so that what was important to those customers was already in place when they transitioned to Rhapsody’s services.
“They may have created playlists on Napster of their favorite songs,” he says. “They certainly had their own user names and passwords that they had created. They had libraries filled with their favorite artists. Their music collection is very important to them.
“So we made sure that as soon as they signed on and they were moved over to the Rhapsody service, all of those familiar characteristics of their music collection were there. Their playlists were there. You were able to continue to recommend music to them based on their listening history. They didn’t have to go create new accounts. We just made it very smooth for them.”
Attention to those migrating customers is crucial, but so too is a focus on the talent from the acquired company that may be beneficial to your growing business.
“No. 3 is there are a lot of very talented people that you can find in companies that are dealing in the technology space,” he says. “How do you combine the two companies, bring them together, merge them and make sure the talent that you emerge with from the acquisition is even greater than you had when you entered it?
“There were some very good business-minded individuals and people with strong technical skill sets that are happy and productive employees that help to carry that across. You have to tap the talents of the potential acquired company.”
Through the leadership of Irwin and the continued execution of the company’s dual-pronged growth strategy, Rhapsody is positioned well to continue to be a strong player in the subscription music space.
“The trajectory that we’re on now over the past 2½ years is pretty exciting,” Irwin says. “We’re a small start-up company coming back into a very exciting industry with tremendous resources, a customer base that has scaled, technology that has matured, and a brand that MTV Networks helped build. So we’re really set up to run forward and have fun.” <<
How to reach: Rhapsody International Inc., (206) 707-8100 or www.rhapsody.com
Life is not only lonelier at the top, it’s shorter. After a recent study of CEO succession events in the S&P 500, The Conference Board has identified this general trend: CEOs have been getting fired faster. Why?
The Conference Board thinks it has something to do with shareholders becoming more aggressive in making changes at the top. That may be. But if so, then why are boards of directors — and the shareholders they represent — increasingly dissatisfied with CEO performance?
In one sense, the job of the CEO is the same as ever: to deliver a good result for shareholders. But excelling in that job today is much harder, particularly because the world has changed.
They say old dogs can’t learn new tricks. But not long ago, successful CEOs didn’t need to. The right person to have in the top job was the one who “knows the way we do things here” and wouldn’t try to fix what wasn’t broken.
As a result, the refrain, “That’s the way we’ve always done it,” wasn’t so much unimaginative as it was prudent. The prevailing mentality was it’s hard to grow a big business. So if you’ve found a way that works, count yourself lucky — and stick to it. Don’t try to reinvent the wheel — or the Coca-Cola.
Get a picture of the path ahead
But globalization, the rise of the Internet and the increasing rate of technological discovery have changed the very nature of being a CEO. Just because you’re in the right business, the right way, today, doesn’t mean you will be tomorrow.
Imagine it’s the year 2000, and you are CEO of a large call center serving the pharmaceutical industry. Your three tasks are to keep quality up, customers happy and land new accounts — until a company in Mumbai starts drastically undercutting your prices. Perhaps for the first time, you must find entirely new ways to think about the business.
That takes time, if a solution can be found at all. So you’re working to formulate a promising response — when you’re fired.
Now imagine you’re the CEO of a video rental company in 2000. Even if it’s a big business, the business is conceptually simple: Your job is to sell more video rentals and to increase the profit on each one.
How? Mostly by opening new stores and by making sure you have many copies of the most in-demand movies on the shelf every Friday night. Plus, you collect late charges. You are really good at those things. You even smoothly make the shift from videos to DVDs. But then someone in California comes up with a novel equation: DVDs + U.S. mail + subscription - stores = Netflix. A seemingly short time passes. You’re fired.
Take time to stop at talents
Corporate America has changed. In the past, a well-regarded CEO was one who could optimize the business model that he or she had. Today, CEOs must not only do that, they need to be skilled in redeploying resources into better businesses. Leaders who excel in running the core business must also be equipped to evaluate nascent opportunities beyond it. And frankly, most of them can’t.
Why not? For the same reason pitchers rarely hit well, and hitters can’t pitch. In baseball, you draft a player for his strengths, knowing he won’t do everything well. That’s why every big league manager knows better than to send the slugger to the mound or bat his closer at clean up.
Is it possible that your big hitter is also the unhittable pitcher? Well, maybe in your dreams.
You may find the CEO who can run the current business better than most or the one who starts and nurtures tomorrow’s winners today. But how many CEOs of large companies can do both very well? All of them could sit together in your living room, comfortably.
Boards that expect old dogs to learn new tricks — while continuing to perform the old ones — simply haven’t come to terms with the new realities of competition. CEOs hired to do both are well advised to cover their bases, and negotiate a severance package up front.
Jerry McLaughlin is CEO of Branders.com, the world’s largest and lowest-priced online promotional products company. Reach him at JerryMcLaughlin@branders.com.